Growth does not equal progress: Why GDP is (increasingly) obsolete

COMMENTARY | February 21, 2012

Gross Domestic Product badly overstates the benefits of unequal growth and understates the value of intangibles, writes an advocate of alternative measurements. As a result, journalists should stop granting it talismanic significance in defining the nation's progress.

A pervasive narrative linking growth in the Gross Domestic Product (GDP) to social progress has shielded our leaders from accountability for a reality in which market growth and real social progress have actually diverged -- even sharply diverged -- in some ways. It's past time we found another way to measure our nation’s progress.

The idea of GDP, or "national income accounting," was introduced in the 1930s, in response to the Great Depression. With a 30 percent contraction of the economy unfolding, it certainly made sense to devise a common national standard for measuring economic output within our borders.

But since World War II, and particularly in the last two decades, GDP has taken on an almost talismanic power in our understanding of progress. Whether a given policy can be projected to increase (or decrease) GDP has become the trump card in most policy debates. Reducing poverty, raising average earnings, preserving our social insurance system are subordinate to -- and dependent on -- the growth rate of GDP. The underlying assumption is that if we have more money in our economy, social problems will be solved, or at least be much easier to solve.

But as the very architect of GDP, Simon Kuznets, warned in 1934 (upon release of the first GDP report), "[t]he welfare of a nation can scarcely be inferred from a measurement of national income." According to a new Demos info-graphic slideshow, "Does Growth Equal Progress?" the last 30 years are a case in point.

When you look closer at what is happening in our society, it is clear that GDP growth has failed to deliver. For example, while GDP roughly doubled between 1980 and 2007, the distribution of all that money has left us more unequal today than at any time since the 1920s. GDP, in other words, tells us nothing about how national income is distributed, and it ignores the negative economic consequences of inequality.

Whether one person captured all the income, or if every person got an equal share, the GDP growth rate (and the rate of "progress") would be the same. In fact, nearly all of our national growth since 1980 went to the top 20 percent, and in the six-year expansion preceding the Great Recession, nearly two-thirds went to the top 1 percent alone.

This kind of highly unequal growth turns out to be very little growth from the standpoint of human welfare, for the simple reason that adding income at the top brings almost no marginal improvement in welfare compared to adding income at the bottom.

Beyond distribution, GDP has other serious problems, in three basic categories. GDP counts many economic "bads" as goods; it completely ignores other economic bads; and it completely ignores many economic goods that have significant value but no market price.

According to GDP, a hurricane cleanup "grows" our economy just like higher manufacturing output does, even though the former doesn't actually improve our overall welfare. Likewise, GDP does not reflect the cost of environmental degradation or pollution. While we count the value of coal-fired electricity in our GDP, we do not include the significant health costs from coal pollution (in fact, studies show that coal-fired electricity generates a net loss of GDP once the health costs are incorporated). Finally, not everything with a value has a price; indeed not everything with important economic value has a price. But GDP has no way of accounting for such things.

If you hire a nanny to watch your kids, you are adding to GDP. If you stay at home to look after your children yourself, you are not adding to GDP, even though the same (or better) service is provided. Volunteering and community activities are similarly uncounted, as is (probably much more significantly) the human and intellectual capital created by public investments in education, health, and research. The value of ecosystem services like drainage and carbon absorption is also ignored, such that when these things are destroyed, the losses are not counted. Obviously, political incentives to protect the environment and other non-market goods are weakened if we do not count the losses or value the potential benefits of these goods.

As documented in a new report, Beyond GDP: New Measures for a New Economy, researchers have been working to correct and augment GDP for more than 30 years, in order to provide a more complete and accurate picture of economic progress. France’s Commission on the Measurement of Economic Performance and Social Progress, led by Nobel-laureate economist Joseph Stiglitz, has drawn worldwide attention to these issues and set the parameters for robust implementation of alternative indicators in 21st century governance. Maryland’s recently adopted Genuine Progress Indicator adjusts the state’s Gross State Product with more than 20 different economic, environmental and social variables, resulting in a measure of the state’s "sustainable economic welfare" as contrasted with its market growth. Well-being and happiness indicators are also gaining traction in national, state, and local settings.

When we hold GDP against other indicators, it’s clear that our policy priorities have been wrong for 30 years. "You get what you measure," as the old management saying goes, and until we start measuring the right things, we will never be able to achieve the right things. In a time of intensifying anger and fading hope in middle America, this is no small thing for our country.

Lew Daly is a Senior Fellow and Director of the Sustainable Progress Initiative at Demos.
E-mail: ldaly@demos.org